In looking at the chart of the U.S. 30 year June bond futures price overlaid with the S&P 500 June futures contract one can easily see how the ‘normal’ pattern for the two respective commodities price discovery shows divergence (see figure 1). That is until the past week or so where we have seen the divergence minimized and, as is the case with today’s price discovery, completely disappear (the bonds are trading 19 tics higher with the S&P 500 in positive territory). This would seem to indicate that one of the two commodity sectors would be ripe for a correction to the downside.
The bond market has spent the past several months climbing up to the highs for the year while the S&P 500 continues to put out all-time high after all-time high. Further reflection would reveal that the bond price discovery has reacted more significantly to bad news than it has to good news, meaning that it has become somewhat skewed to the actual data, lending credence to the idea that the bonds are significantly overpriced at these levels and in this climate.
Red Line: U.S. 30 Year Bond Future Black Line: S&P 500 Index Blue Shading: Divergence Orange Shading: Consolidation